Monetary Policy ALA

Suppose the Federal Reserve wants to decrease the money supply by $400 billion. If the reserve requirement (rr) is 0.2, calculate the change in reserves that the Federal Reserve must make.

$80 Billion

Which of the following refers to a liquidity trap?

A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve refers to a(n) trap.

Actions taken by a country's central bank to expand the money supply and lower interest rates with the objective of increasing real GDP and reducing unemployment is monetary policy.

expansionary

The funds rate is the interest rate that banks pay when borrowing reserves from other banks.

federal

The money multiplier is the amount by which a $1 change:

in reserves will change the money supply.

Monetary policy affects (blank) rates charged on loans and paid on savings.

Interest

When aggregate demand rises, to decrease aggregate demand, we can use monetary policy.

contractionary

When aggregate demand rises, to avoid and return to the long-run equilibrium, we must decrease aggregate demand.

inflation

The reserve requirement is the percentage of deposits that banks must keep on hand as reserves.

minimum

(blank) policy affects interest rates charged on loans and paid on savings, thereby influencing the price of goods, services, and resources.

monetary

Governments (blank) use policy to keep prices stable and encourage economic growth.

monetary

Suppose the Federal Reserve wants to decrease the money supply by $400 billion. If the reserve requirement (rr) is 0.2, calculate the change in reserves that the Federal Reserve must make.

80 billion

A decrease in aggregate demand will cause the price level to and unemployment to in the short run.

Blank 1: decrease, fall, drop, or decline Blank 2: rise or increase

An increase in aggregate demand will cause the price level to (increase/decrease) and unemployment to (fall/rise) in the short run.

Blank 1: increase Blank 2: decrease or fall

Suppose the current federal funds rate is 4%, and Fed wants to decrease the rate to 2%. How will the Fed decrease the Federal Funds rate?

Buying bonds in the open market. Reason: To decrease the federal funds rate, the Fed will conduct open market operations by buying bonds. This will increase the supply of reserves available, which will decrease the supply of federal funds and decrease the federal funds rate.

The (blank) rate is the interest rate at which banks can borrow money directly from the Federal Reserve.

Discount

(Blank) reserves are equal to total reserves minus required reserves.

Excess

Monetary policy refers to the action of the (blank) to influence the supply of money and credit in the U.S. economy.

Fed, Federal Reserve, central bank, or federal reserve

Monetary policy refers to the action of the (blank) Reserve to influence the supply of money and credit in the U.S. economy. (Use only one word for the blank)

Federal

Which of the following is a monetary policy tool used by the Federal Reserve?

Paying interest on excess reserves

Suppose the Federal Reserve is planning to conduct expansionary monetary policy during a recession. Which of the following is a tool they may consider using?

Reducing the interest rate paid on excess reserves

reserves are the fraction or portion of checkable deposits that a bank must keep on hand.

Required

The fraction of checkable deposits that banks must keep on hand as reserves, either as currency or on deposit with the Federal Reserve, is called the:

Reserve Requirement

How does selling bonds in the open market change the federal funds rate?

Selling bonds decreases the supply of reserves, causing the federal funds rate to increase.

How is a change in the money supply calculated when there is a change in excess reserves? Multiple choice question.

The change in the money supply equals a negative money multiplier (−1/rr) multiplied by the change in excess reserves.

What is the reserve requirement?

The fraction of checkable deposits that a bank must keep as reserves, either as currency or on deposit with the Fed.

Which of the following refers to the implementation lag? Multiple choice question.

The time between when a policy is enacted and when it has its full effect on the economy.

he federal funds market is the market for borrowing and lending reserves between

banks

Actions taken by a country's central bank to contract the money supply and raise interest rates with the objective of decreasing real GDP and controlling inflation is monetary policy.

contractionary

The actions taken by a country's central bank to contract the money supply and raise interest rates is called:

contractionary monetary policy. tight money.

To increase gross investment, the interest rate must: Multiple choice question.

decrease

When aggregate demand falls too much to increase aggregate demand, we can use monetary policy.

expansionary

monetary policy is sometimes referred to as "easy money."

expansionary

The actions taken by a country's central bank to expand the money supply and lower interest rates is called:

expansionary monetary policy

When aggregate demand falls, to increase aggregate demand, we can use monetary policy.

expansionary monetary policy

The time between when a policy is enacted and when it has its full effect on the economy is called the __ lag. The time between when an event affects an economy and the time when we recognize that effect in the data collected is called the __ lag.

implementation; recognition

To decrease gross investment, the interest rate must

increase

Monetary policy affects aggregate demand by changing the quantity of demanded in the economy.

investment

A situation where increasing the money supply does not lower interest rates due to a flattening of the money demand curve refers to a(n) trap.

liquidity trap

Governments use to keep prices stable and encourage economic growth.

monetary; policy

A market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances is called a(n) market

money

Which of the following describes a market in which the demand for and supply of money determine an interest rate or opportunity cost of holding money balances?

money market

The fraction of checkable deposits that banks must keep on hand as reserves either as currency or on deposit with the Federal Reserve is called the:

reserve requirement.

If an economy experiences a change in excess reserves, the change in money supply will also depend on Multiple choice question.

the money multiplier.

The money multiplier equals:

the overall change in the money supply/the initial change in reserves.

The (blank) rate is the payment made to agents that lend or save money expressed as an annual percentage of the monetary amount lent or saved.

using open market operations to buy and sell government debt (U.S. Treasury bonds).

Which of the following does the Federal Reserve Board set a target for?

The federal funds rate

demand describes the overall or total demand for all final goods and services produced in an economy.

aggregate

When aggregate demand falls, to avoid a(n) and return to the long-run equilibrium, we must increase aggregate demand.

recession